You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.
Use a 1031 Exchange to Defer Capital Gains
It's a popular way to defer capital gains taxes when selling a rental home or even a business. Often referred to as a “like-kind” exchange, this tax deferment strategy is defined in Section 1031 of the Internal Revenue Code.
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $47,025 for single and married filing separately; $94,050 for married filing jointly and qualifying surviving spouse; and. $63,000 for head of household.
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows you to defer paying capital gains taxes by reinvesting the proceeds from the sale of your investment property into a similar property.
Current tax law does not allow you to take a capital gains tax break based on your age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales, though this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
Get top local stories in Southern California delivered to you every morning. > Sign up for NBC LA's News Headlines newsletter. Starting in 2025, single filers qualify for the 0% long-term capital gains rate with taxable income of $48,350 or less, while married couples filing jointly are eligible with $96,700 or less.
Use tax-advantaged accounts
Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account. However, you will pay income taxes when you withdraw money from the account.
If you like your rental property enough to live in it, you could convert it to a primary residence to avoid capital gains tax. There are some rules, however, that the IRS enforces. You have to own the home for at least five years. And you have to live in it for at least two out of five years before you sell it.
Use Capital Losses to Offset Gains
Say you own two stocks, one worth 10% more than you paid for it, while the other is worth 5% less. If you sold both stocks, the loss on the one would reduce the capital gains tax that you would owe on the other.
The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new ...
Take Advantage of Section 1031 of the Tax Code
Real estate investors can defer paying capital gains taxes using Section 1031 of the tax code, which lets them sell a rental property while purchasing a like-kind property and pay taxes only after the exchange is made.
Capital gains up to Rs 1.25 lakh per year (equity) are exempted from capital gains tax. Long-term capital gain tax rate on equity investments/shares will continue to be charged at 12.5% on the gains. On the other hand, short-term capital gains tax on shares or equity investments will be charged at 15%.
The short-term rental tax loophole allows for the favorable tax treatment of income from short-term rental properties when certain conditions are met. The loophole benefits property owners who don't meet the criteria for Real Estate Professional Status (REPS).
1031 Exchange
As long as the new property you buy is of equal or greater value than the one you sell, the program lets you swap them for tax purposes. That means you can defer paying the capital gains tax on the sale of the first property. You can use 1031 exchanges indefinitely.
The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion. If the capital gains do not exceed the exclusion threshold ($250,000 for single people and $500,000 for married people filing jointly), the seller does not owe taxes on the sale of their house.8.
This tax is applied to the profit, or capital gain, made from selling assets like stocks, bonds, property and precious metals. It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset.
If it's your primary residence
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years.
Since there is no age exemption to capital gains taxes, it's crucial to understand the difference between short-term and long-term capital gains so you can manage your tax planning in retirement.
By placing investments with higher growth potential in tax-advantaged accounts, like IRAs or 401(k)s, and lower growth potential investments in taxable accounts, you can potentially minimize your capital gains tax liability. Another important strategy is adopting a long-term perspective on investments.
Q: Can you avoid capital gains tax by buying another house? A: Yes, if you sell one investment property and then immediately buy another, you can avoid capital gains tax using the Section 121 exclusion. However, you must reinvest the sale proceeds into a new real estate property to qualify.
By properly deducting eligible closing costs and major improvements, you reduce your capital gain, potentially lowering your tax liability significantly.